The FCA’s latest market cleanliness indicators should prompt UK hedge fund managers to test whether their market abuse risk assessments are fit for purpose and their surveillance arrangements work in practice.

The data is an indication, not a verdict

At 41.1%, the headline number is hard to ignore. In the FCA’s 2025/26 market cleanliness results, the figure is the proportion of UK takeover offer announcements preceded by positive abnormal price movements in the two trading days before the news. The FCA’s Abnormal Trading Volume Measure also rose by 2.5% compared to 2024, while the FCA received 3,806 Suspicious Transactions and Order Reports (STORs), of which    over 82% were suspected cases of insider dealing.

These indicators do not establish that market abuse has occurred. Genuine market volatility, legitimate trading, analyst activity, and media speculation can affect the results. But for a compliance officer, indicators moving in the wrong direction provide a timely reminder to test whether the firm’s controls can identify the right issues.

Showing evidence of controls

The FCA is no longer satisfied with a policy that merely states that the firm monitors for insider dealing and market manipulation. Firms must now go further and explain how those risks arise from their specific strategies and demonstrate that the controls addressing them are complete, operating effectively, and regularly tested. 

Article 16(2) of the UK Market Abuse Regulation (UK MAR) has always required alternative investment managers to maintain systems and controls designed to detect and report market abuse. The FCA has made it clear that firms must ensure that those arrangements are effective and proportionate to the risks which arise from their business model and control environment.
   
A detailed Market Abuse Risk Assessment (MARA) provides a practical foundation for a framework that meets the FCA’s expectations, although UK MAR does not require a firm to have a MARA. 

A firm’s MARA should map realistic scenarios in which market abuse risk may arise by strategy, instrument, venue, information source, and trading behaviour. Firms pursuing event-driven investment strategies should consider how inside information relating to targets of M&A transactions or secondary offerings of the target’s equity capital. 

Firms executing credit investment strategies may need to assess the risks associated with lenders, restructurings, and private-side information, together with the controls designed to mitigate them. Firms operating systematic strategies should consider whether order placements, amendments, or cancellations could create misleading signals. The analysis must also cross-desk boundaries, recognising that information that has been received by one team could affect the trading activities of another. The framework should link each material scenario to preventive controls and surveillance techniques, as well as escalation and remediation procedures.

Surveillance must be tested end-to-end

Trade and communications surveillance systems are critical controls for detecting market abuse.  Supervisory findings show that the production of trade alerts alone is a poor measure of surveillance effectiveness. Surveillance can appear healthy, while missing news feeds, defective alert logic, or incomplete order and trade data can leave areas of activity unmonitored. 

A surveillance system’s model may generate credible alerts and support STORs while failing to capture less liquid instruments. A compliance officer at an alternative investment manager must therefore establish not only whether alerts are being received, but also whether the scope of the firm’s surveillance is complete.

Accordingly, a firm should be able to demonstrate:

• which inputs are used to trigger an alert (e.g., orders, trades, instruments, client accounts, trading venues, events).
• that relevant communications are incorporated into reviews, where applicable.
• how completeness and accuracy are governed and checked.
• that alert thresholds are appropriately calibrated. Well-calibrated thresholds cannot compensate for defective logic or incomplete data.

The same disciplines apply to manual surveillance. A lower-volume investment manager may use event-based reviews rather than complex models or systems, but the trade population, alert triggers, reviewers, timeframes, and supporting documentation should still be defined. Alert ageing, false-negative testing results, data exceptions, and overdue remediation should be visible to the compliance officer and senior management. 

Proportionality does not justify informality

Smaller managers may use simpler controls, but simplicity is not the same as informality. Risks can emerge in several ways. Close working relationships can erode independent compliance challenge, unwritten procedures can lead to inconsistent decision-making, and shared offices or unrestricted access can undermine information barriers. 

Proportionate controls may be simpler, but they should still be written, repeatable, and evidence-based. Senior management oversight and staff attestations can also help to demonstrate that responsibilities are well understood.

Internal discipline is particularly important during market soundings. A central gatekeeper is usually appointed to control a firm’s consent to receive a market sounding and identify which staff may receive the sounding. Only individuals who have been wall-crossed should receive the information, and expanding email chains should be prohibited. 

A firm’s records must capture the details of the market sounding, including consent, time, source, issuer, instruments, recipients, information received, restrictions imposed, and the basis for cleansing. The firm must also make its own assessment of whether it holds inside information rather than relying solely on the disclosing party’s determination.
Personal account dealing is another area where firms should test control effectiveness. Senior acquiescence is not a control. Watch lists, restricted lists, and employee dealing records should enable compliance to identify conflicts between personal activity, information held by the firm, and fund trading.

Escalation must produce defensible decisions

Surveillance is only effective if concerns lead to a timely and independent review.  Firms should preserve data relating to relevant orders, trade executions, investment research, and internal communications. Investigations should consider related instruments, accounts, and any identified conflicts. STOR decisions should be recorded with a clear rationale. The threshold for reporting is reasonable suspicion, not proof, and internal investigations should not create avoidable delay.

Management information should expose weaknesses rather than merely report activity. Useful metrics include: surveillance coverage gaps, the number of data exceptions, alert ageing, investigation outcomes, STOR decisions, wall crossings, restricted list changes, personal account dealing breaches, testing deficiencies, and remediation status.

Good practice is demonstrated, not described

A defensible market abuse framework enables a hedge fund manager to show how its risks were identified, how controls have addressed them, how surveillance has been tested, and how concerns are escalated and resolved. The 41.1% statistic is not a guilty verdict on the UK market. But it represents a control challenge, “Can the firm show that its control framework would identify suspicious conduct before the FCA asks why it did not?”

Regular testing and independent assessment help firms evidence the effectiveness of their market abuse framework before regulators ask them to do so.